The Politics of Speculative Attacks in Industrial Democracies

Abstract

Recent models of speculative currency crises contend that market expectations of policy behavior can trigger a speculative attack. We argue that political processes and partisan objectives inform expectations about the government's commitment to the exchange rate. First, market actors anticipate periods when the partisan identity of a government may change through an election or a cabinet collapse. Second, party labels provide information to currency traders about the policy objectives of a potential government. Consequently, we contend that the probability of a speculative attack will be higher when markets expect the cabinet to end and when the cabinet dissolution is likely to produce a leftward shift in policy. A discrete timesurvival model is used to estimate the probability that a cabinet will dissolve in any given month for sixteen parliamentary democracies from 1970 to 1995. The predicted values are then used as a proxy for market expectations in a model of speculative currency crises.